M&A Intangible Asset Due Diligence

An action routinely overlooked, but, one that is increasingly critical to achieving a desired – projected outcome of a merger and/or acquisition is conducting intangible asset due diligence in both pre, and post transaction contexts. The presumption is, given the indisputable economic fact that 80+% of most company’s value, sources of revenue, competitive advantage, and sustainability today lie in – emerge directly from intangible assets, the parties to an M&A believe they can further exploit the intangibles they are about to acquire.

The second and equally important purpose for conducting pre-post (intangible asset) due diligence is to provide forward looking – sensing radar to detect – alert parties to the assets’ stability and/or risks which, if materialized, would variously adversely affect the intangible assets integral the M&A’s outcome. ensure the intangible assets sought will be provide parties to an M&A. My experience indicates that providing forehand knowledge that pre-post transaction due diligence is be conducted, with a focus on the essential – strategic intangible assets in play, serves as attractive assurances to boards, investors, and other equity sources to M&A’s.

Interestingly, forehand knowledge that pre-post transaction (intangible asset) due diligence will be conducted, does not go unnoticed by sellers – targets of an M&A. That is, there may be less inclination to inadvertently or purposefully undermine or destabilize a transaction by allowing valuable – competitive intangible assets, i.e., intellectual, structural, and/or relationship capital to dematerialize in advance of transaction execution, and therefore change the character – important components of a transaction, brand and reputation especially.

To not engage in pre-post transaction (intangible asset) due diligence is to assume the epitome of transaction risk, because, among other reasons, risk to intangibles can and frequently do materialize at keystroke speed, often under conventional business (risk) radar. And, to assume intangible assets are somehow irrelevant to the operational realities and sustainability of an M&A target and any other business transaction, for that matter, suggests the proverbial ‘tea leaves’ are, at minimum, being substantially misinterpreted, or worse, utterly ignored.

The risks I am referring to, for M&A’s specifically, is the potential – probability that valuable intangible assets most relevant to achieving a projected – desired near term and strategic outcome, can do so, primarily and/or only when-if they remain fully intact and stable, and, not experience, instead, some level of potentially irreversible erosion and/or undermining of their value as a continued source of revenue, competitive advantage, or projected synergy, etc. These are risk realities which can be mitigated, if not wholly avoided by…

In today’s aggressive, predatorial, and winner-take-all business transaction environments its essential to determine if the about-to-be-purchased (intangible) assets can-will sustain a deal’s objectives. Therefore, negotiating transaction covenants in advance, function as entrées to…
• identify and monitor risk to key assets which can materialize in the
interim, and
• safeguard and preserve asset value, revenues, and competitive
advantages.

The intangible assets to a merger – acquisition target, presumably exploitable and variously liquid, are characteristics which today are routinely outpaced and indifferent to conventional (reactive) intellectual property enforcements, i.e., patents, trademarks,
copyrights, etc. This elevates vulnerability to many different forms of internal-external asset compromises that often are preludes to asset value erosion that can literally sabotage M&A deals.

Examples include unabated misappropriation, infringement, product counterfeiting-piracy, poorly and/or un-monitored violations of non-compete and non-disclosure agreements, as well as other under-conventional business radar forms of intangible asset entanglement and ensnarement that contribute to transaction friction, challenges, and disputes that stifle – undermine deal trust, momentum and finalization.

When these occur (singularly or in multiples) prior to deal finalization, the value of the about-to-be purchased assets (intangibles) can quickly hemorrhage. Once known, the terms of the deal (as articulated in the covenants) should be subject to renegotiation to continue to sustain the buyers’ objectives.